Central bank digital currencies - design principles and balance sheet implications

Michael Kumhof and Clare Noone ()
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Clare Noone: Reserve Bank of Australia

No 725, Bank of England working papers from Bank of England

Abstract: This paper sets out three models of central bank digital currency (CBDC) that differ in the sectors that have access to CBDC. It studies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC. We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed. The core principles are: (i) CBDC pays an adjustable interest rate. (ii) CBDC and reserves are distinct, and not convertible into each other. (iii) No guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks (and therefore by implication at the central bank). (iv) The central bank issues CBDC only against eligible securities (principally government securities). The final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and that the private market can freely obtain additional CBDC from the central bank, at the posted CBDC interest rate and against eligible securities.

Keywords: Central bank digital currencies; sectorial balance sheets; monetary systems; financial stability; bank runs (search for similar items in EconPapers)
JEL-codes: E42 E44 E52 E58 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2018-05-18
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pay
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Citations: View citations in EconPapers (99)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0725

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